Commercial Trading of NFTs in Germany
The NFT market is getting bigger and bigger. In the first quarter of 2022, the trading volume on the two largest NFT trading platforms already amounted to USD 116 billion.
However, the taxation of trading in NFTs has still not been clarified in Germany either by the tax authorities or by case law. In particular, it is unclear when trading in NFTs is to be classified as commercial within the meaning of income tax law.
The tax consequences of being classified as a commercial NFT trader are considerable.
- On the one hand, additional trade tax is then incurred. As a rule, this amounts to between 7 and approx. 15 percent.
- Secondly, every profit is taxed regardless of a holding period. NFT sellers thus have no possibility of making tax-free profits. The one-year speculation period does not apply to commercial NFT traders.
Criteria of commercial NFT trade
The basic criteria for commercial activity are independence, sustainability, intention to make a profit and participation in general economic activity.
- The independence of the activity is determined by the entrepreneurial risk and the entrepreneurial initiative shown by the taxpayer. If one is only a holder of an NFT, neither of these is realized. The investor merely bears the price risk, as with any private investment, and generally cannot influence the value of the NFT on his own initiative. However, with increasingly entrepreneurial action, the risk increases; one approaches independent action.
- In order to avoid sustainability of trading, one should not sell NFTs in a predictable and regular manner. However, the tax authorities may assume sustainability even at the first sale if external circumstances indicate this.
- In order to avoid an intention to make a profit, it does not depend on the internal circumstances. The tax authorities focus on whether profits are actually to be made. There will usually be no doubt about this.
- Those who offer their NFTs for sale on public trading sites such as opensea.io and looksrare.org participate in the general economic traffic. The vast majority of sales naturally take place on such public platforms. Participation in economic traffic can therefore hardly be avoided. Exceptions prove the rule: Market openness is missing, for example, in the case of purely intra-family sales.
Commercial use vs. private asset management
The decisive factor in deciding whether an activity is of a commercial nature or not is the question of whether the action has already exceeded the scope of private asset management. In the case of securities transactions, this question has been asked for many decades. The criteria developed in this context are also suitable for clarifying whether an NFT investor is engaged in commercial activities:
Essentially, it is always a question of whether the investor already acts like a trader, i.e. whether he makes use of third parties (labor), maintains office space and/or another professional organization, engages in marketing, professionally prices and sells his "goods", finances his transactions externally, invests a particularly large amount of working time, also offers his investments to third parties, his investments are geared to the turnover of NFTs (flipping), etc. - or whether his behavior resembles that of a classic passive investor who merely takes the normal price risks inherent in any private financial investment and tends to follow more of a HODL approach.
The decision must be made taking into account the totality of all circumstances and also always depends on the personal financial circumstances.
Your circumstances are decisive | We advise you on NFT trading
The question of commerciality of NFT trading in Germany is always decided by your very specific circumstances. We will gladly support you by
- examining your individual circumstances to determine whether you already run the risk of being classified as commercial for tax purposes,
- developing a concept to avoid commerciality that meets your tax objectives,
- defend you against the classification as commercial vis-à-vis your tax office or also in court
- and vice versa, e.g., also consciously accompany your way into commerciality in order to avoid loss offsetting restrictions, if applicable.
Your advisors for commercial NFT trading in Germany
Are you about to expand extensively? Do you fear that you have already entered the commercial sphere? Are you thinking about taking the step towards commerciality or towards a trading limited liability company? Then contact us! Our experienced tax advisors and tax lawyers will be happy to assist you.
The easiest way to reach us is via our contact form for taxation of crypto assets or alternatively via e-mail (info@winheller.com) or phone (+49 69 76 75 77 80). So do not hesitate and get in touch with us!
